• Portfolio reversion of -2.3% in 3Q20 but occupancy inched up from 91.5% to 91.9%. Low-single-digit positive reversions for FY20e still achievable owing to stronger leasing in 1H20, in line with our rental reversion forecasts.
• Weaker industrial outlook mitigated by scale and diversified tenant mix. No pre-terminations except for SG portfolio: nine tenants accounting for 1,800sqm of NLA.
• Upgrade to BUY with lower DDM TP of S$3.61, down from S$3.63, mainly due to higher debt and perpetual securities. Estimates tweaked for recent acquisition of MQX4. Recent pullback in share price presents better entry price, and total returns of 31.5% to our TP – upgrade to BUY.

Positives

+ One more in the bag. AREIT announced its acquisition of MQX4 on 18 September 2020. This is a suburban office under development in Macquarie Park, Sydney, bought at a “as if completed” market valuation of S$161mn. The completed asset will have a net lettable area of 19,384 sqm, comprising 17,753 sqm of office space and 1,631 sqm of retail space. The acquisition will be funded with debt and/or internal resources and carries an initial NPI yield of 6.1%. A 3-year rental guarantee can provide upside if AREIT can lease out the property before the rental guarantee period ends. Completion of the land sale is expected in 4Q 2020, and of MQX4, around mid-2022. This is AREIT’s third acquisition YTD, following its purchase of a 25% stake in Galaxis and a logistics asset under development in Kiora Crescent, Yennora, Sydney in March and July 2020 respectively.

+ Portfolio occupancy up from 91.5% to 91.9%. Singapore occupancy rose from 87.9% to 88.8%, supported by higher occupancy at Cintech II (30 Sep 2020: 100%, 30 Jun 2020: 0%) and a logistics asset, 40 Penjuru Lane (30 Sep 2020: 98.8%, 30 Jun 2020: 85.5%). This was partially offset by a decline in Australian occupancy from 98.4% to 97.5% due to a non-renewal at 92 Sandstone Place, Brisbane. Take-up was mainly driven by the government and logistics and supply-chain companies. 

+ Gearing improved from 36.1% to 34.9%; cost of borrowing down from 2.9% to 2.8%. Gearing improved largely due to S$300mn non-call green perpetuals issued at 3.0%, which are counted as equity in gearing calculations. Total gross borrowings and perpetual securities to unitholders’ funds amounted to 63.3%. Adjusted interest coverage, which includes interest payment for the perpetuals, is estimated at 3.9x (2018: 4.2x). This is amply above the MAS’ 2.5x minimum. Earnings are expected to be underpinned by its diversified rental income from industrial assets which have shown resilience to the economic downturn. Out-of-pocket rebates totalled just 2% of FY20e revenue.

Negative

– Portfolio rental reversion of -2.3%. Despite better occupancy, Singapore reversions were a negative 2.8%. Larger space signed with negative reversions wiped out AREIT’s +11.5% reversions in the US. Aside from business parks’ positive 4.5%, reversions for the other asset classes were flat or negative: Logistics and Distribution Centres (-16.2%), High-Specification (-3.3%), Light Industrial (-1.4%) and Integrated Development (flat). 9M20 portfolio reversions came in at +4.2%. We think low-single-digit positive reversions for FY20e are still achievable owing to stronger leasing locked in in 1H20.

Outlook

Subdued leasing is expected as companies continue to put business and expansion plans on hold out of caution. Singapore industrial rents were weak in 3Q20 while sector occupancy only crept up due to warehouse leasing. 

Upgrade to BUY with lower TP of S$3.61, from S$3.63

We adjust our forecasts to reflect its acquisition of MQX4. Our TP dips to S$3.61 due to higher debt and perpetual securities. Recent pullback in share price presents better entry price and total returns of 31.5% to our TP. As such we upgrade our call from Accumulate to BUY.

AREIT’s S$13.8bn portfolio comprises 197 properties across Singapore, Australia, the UK and the US. This results in low asset-concentration risks, with no property accounting for more than 4.6% of its revenue. Such geographical diversification and low tenant concentration – 1,450 tenants, the largest at <4% of revenue – help to attenuate the economic impact on its portfolio. Its portfolio weighted average security deposit is about 5.3 months of rental income.

Source: Phillip Capital Research - 2 Nov 2020